By Gary Brooks, CFP®
It’s nice to watch your account balances rise during an extended stock market rally, but investment gains aren’t the only important elements of your long-term financial success.
Growth of your financial capital is important but, for most people, it is their human capital that is paramount. As you resolve to improve your financial security, focus more on what you can do to improve your human capital rather than what you can do to make more money in the market.
Your human capital is your earnings power. It is comprised of your education, skill set, and the value you bring to your employer (sometimes yourself).
Don’t be tempted to think that the fast money of zippy investments is the best route to your long-term financial security. If you can increase your human capital and maintain it at a higher level for longer, the less heavy lifting markets will have to do to help you address your financial and life goals.
Generally, the bigger problems you can solve, the more valuable you will be and the higher your earnings power will rise. Of course, there are limiting circumstances for many people, but no one is prohibited from improving their position.
Rather than focus on return on investment in your 401k, IRA, etc., think in terms of return on the investment in you. These investments in your human capital could ultimately be worth multiples of any investment tips you receive regarding your financial capital.
Consider some ways to increase your human capital.
- You’re never old until you stop learning. Add a certification, specialized skills, or take classes that allows you to contribute useful perspective and fill knowledge gaps in your organization.
- Find a successful mentor/coach in your industry.
- Market yourself, don’t be the best kept secret in your company.
- Understand where your industry is headed and where you can get ahead of the curve, on the leading edge, to add more value.
- Gain clarity on where your current income is going. Are you paying yourself first (with retirement plan savings)? How can you keep more of what you make and increase the difference between earnings and expenses. Doing this and paying down debt are two ways to improve your net worth with no investment return required.
Are you a stock or a bond?
Thinking in terms of your entire financial life, it may be wise to consider how you would classify your human capital in relationship to your investments.
Perhaps you are a self-employed individual or salesperson. Your income is variable but with great future growth prospects. Some months you have significant spikes, other months you live off of a line of credit from your bank. Some years, you maximize your retirement plan contributions. Other years, it is more difficult to do so. In this case, your human capital is more like a stock.
Or, maybe you’re a long-time company employee with a steady cost-of-living raise and you will have pension income in addition to Social Security in retirement. This makes you a bond.
These human capital characteristics should be considered when you think about how to allocate your investments. If your income goes through boom and bust cycles, you may want some of your invested assets in a stable environment. If you have a lot of income security, especially in retirement, you may want to increase the stock market exposure in your investment accounts to increase the likelihood of outpacing inflation.
Regardless of your situation, your financial plans should be broad enough to consider the intersection of your financial capital and human capital.
Protect your human capital
The more reliant you and your dependents are on your human capital, the more important it is to protect that asset. The risk of losing your human capital through premature death or disability can be offset by the wise use of insurance.
Especially in the case of self-employed people who do not have group insurance benefits available through an employer, it is critical to protect risks to your human capital. Life insurance is usually the first consideration of most people, but disability insurance statistically is more likely to be necessary. That’s why disability insurance premiums are higher in many cases than life insurance.
Of course, your health is also a significant influence on your human capital. The longer you can maintain a vibrant life doing what you enjoy doing, the more human capital you have via a longer career. The risk of a career being shortened unexpectedly is much higher than most people realize. Job loss, poor health, or the need to care for someone can be prematurely detrimental to your human capital.
Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor. Reach him at firstname.lastname@example.org.
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